Allens

Renewable Energy

Client Update: National Energy Guarantee

28 November 2017

In brief: The Energy Security Board recently released a report summarising the results of its modelling of the Federal Government's new energy policy, the National Energy Guarantee. The Energy Security Board's report was considered by the COAG Energy Council at its meeting on 24 November, 2017 and gives an insight into how the National Energy Guarantee will be formulated. Partner Kate Axup (view CV) and Senior Associate Karla Drinkwater look at COAG's decision making in relation to the National Energy Guarantee, the governance framework proposed for the Guarantee, and how certain states may need to counter possible competition issues.

Background

Following the Federal Government's announcement of its proposed National Energy Guarantee (the Guarantee) on 17 October 2017, the Energy Security Board (ESB) was requested by Federal Energy Minister Josh Frydenberg to undertake modelling on the proposed Guarantee in accordance with certain stipulated criteria.

Is there consensus at COAG?

The COAG Energy Council comprises representatives from the Commonwealth, each state and territory of Australia and a representative of New Zealand. Subject to specific voting requirements in the relevant governing Act or instrument for a matter, the COAG Energy Council makes decisions by consensus, with each jurisdiction entitled to one vote. Where the voting members cannot reach agreement, the Council makes decisions on a majority basis, with jurisdictions in the minority not bound to implement the decision made.

The Commonwealth is far from having unanimous support for its Guarantee, with only Victoria, New South Wales and Tasmania voting with the Commonwealth to proceed with the Guarantee design work.

The COAG Energy Council members that did not support the motion to proceed with the Guarantee design work are:

South Australia and the Australian Capital Territory – voted against the motion to undertake the design work and instead requested that further modelling of the Guarantee against the proposed Clean Energy Target and Emissions Intensity Scheme be conducted.

Queensland – did not attend last week's COAG Energy Council meeting or vote on the motion due to the Queensland Government being in caretaker mode ahead of the state election on 25 November.

Western Australia, the Northern Territory and New Zealand – the vote was likely conducted in accordance with the rules for National Electricity Market matters set out in section 4 of the Australian Energy Market Agreement as the ESB indicated that its preference is to implement the Guarantee by amendments to the National Electricity Law. On this basis, the representatives from Western Australia, the Northern Territory and New Zealand would have participated as observers only.

While all jurisdictions are expected to be involved in the design work, it is not yet clear how dissent by one or more jurisdictions regarding the implementation of the final Guarantee design would be addressed, and what that would mean for the National Electricity Market. For example, the ESB has proposed implementing the Guarantee by imposing additional requirements on retailers and large customers as part of their National Electricity Market registrations (which are not jurisdictionally based – and therefore cannot be 'opted out of').

What do we know about the governance aspects of the Guarantee?

As noted above, the ESB has recommended that the Guarantee be implemented by a change to the National Electricity Law, with joint rules to be adopted by the AEMC and enforced by the AER. In this way, the Guarantee will be implemented and enforced using structures and regulatory bodies which are already in existence and familiar to all stakeholders.

With the mechanism established in this way, the Commonwealth would then be responsible for setting the policy aspects of the Guarantee, including determining:

the emissions reduction target1 to be implemented through the Guarantee (as well as any linkages between this and relevant international targets);

the framework for measuring, reporting and verifying emissions through the National Greenhouse and Energy Reporting Scheme and tracking carbon offsets; and

what are considered emissions-intensive, trade-exposed activities and any associated exemptions.

Under this proposed governance framework, state and territory governments would not have a role to play (otherwise than as members of COAG in the establishment process).

Competition concerns

The ESB has acknowledged that the effectiveness of the Guarantee will depend in part on whether retail and generation markets are competitive. As the objectives of the emissions and reliability aspects of the Guarantee can be met by either:

contracting with third party entities;

horizontal integration (in the case of the reliability requirement); or

vertical integration (in the case of both the emissions and the reliability requirements),

the ESB has noted that this may compound market concentration in certain jurisdictions, such as South Australia and Queensland, where a small number of gentailers hold significant market share in both the retail and generation sectors.

The ESB suggested the following three mechanisms that could be used to inhibit further market concentration:

generator ownership – eg. placing limits on the share of generation a corporate group can own, operate or control (including through contracts) in a market;

cross-ownership – ie. restricting entities from being both a retailer and owning, controlling or operating generation assets; and

retail activities – ie. restricting which entities can be a retailer.

The ESB stopped short of recommending the Guarantee include a mechanism to address the risk of increased market concentration and suggested that the mechanisms described above could be implemented by individual jurisdictions (eg. by the introduction of the type of cross-ownership rules which used to apply in certain states).

However, the ESB also indicated that it had insufficient time to fully consider the implications of restraints on market power in the context of the Guarantee and the wider energy governance framework but that a detailed consideration of these matters could be effected as part of the detailed design. Accordingly it remains to be seen whether the design of the Guarantee will incorporate a market concentration component.

Next steps

The ESB's report is expected to release a draft design paper on the Guarantee in early February 2018.

Public consultation (through stakeholder forums and written submissions ) on the draft design is expected to be held in March 2018, with the results incorporated into the ESB's submission on the proposed design and implementation of the Guarantee to the COAG Energy Council for consideration at its April 2018 meeting.

If the COAG Energy Council approves the policy approach set out in the draft design paper, the ESB has indicated that it will work with stakeholders to gain further input on the detailed design elements of the Guarantee from May 2018 in order to develop the legislative and rule change requirements to be presented to the COAG Energy Council for approval in late 2018.

The Allens Energy team will be tracking these developments and will provide further updates as information becomes available.

Footnotes

The ESB has indicated that while there would be a national target, the proportion of emissions reduction within the ambit of the Guarantee would be tailored to the National Electricity Market, with Western Australia and the Northern Territory able to adopt a different mechanism and intensity target (if required).

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